We are at very technically important levels in a lot of instruments, and although things have gone fairly technical (and fairly well) particularly since the re-pledge of Zero Interest Rate Policy and all but imminent Quantitative Easing from the Fed. Since, everything else has came in pretty much in a Goldilocks fashion. Remember that Goldilocks trespassed on a family of three bears.
The Chinese zodiac however, has bulls but not bears!
This is the first part of a discussion of wider trends, but it will be the more meaty one since it includes a lot of technicals in a lot of markets.
First, you ought to scrub my blog for some technical insights to be up to speed. A quick recap:
Longer term technicals:
Shorter term technicals:
- HSI equities: New Years, Pre- Lunar New Year
- HSI itself: Lunar New Year open, HSI triangle break
- Gold: Fibs and trades, Almost-breakouts.
I will draw upon charts seen in these posts heavily in my writing going forward, and stating why I think that the markets are now posted at paradigm shift levels, drawing upon other risk assets. Another post (Risk Asset Playbook) will outline just what I assume to be risk assets and what I don’t, and this will be rather imperative for your understanding of my view of the fundamentals, although that it itself requires you to see the technical evidence first. Furthermore, I will naturally draw upon my current exposure to strengthen my Hong Kong trades and analyze potential breakouts.
To the meat:
Indices Flaring Green:
There is a lot of different bullish signals in indices pretty much everywhere.
The S&P is currently breaking above the long-term trend outlined in the long term analysis, and looks to be lifted by the quick ramp up (three ramps with parallel, steep upwards slopes, indicative of monetary easing or expectations thereof). Based on this alone, if it were to keep holding, then the S&P looks set to hit 1 400 this quarter (+5.3%), if not this month. Not predicting it will happen, mind you, the lack of volume lately is flat out scary, but still rather important to look out for. Again, more QE is key for this to happen, but we will come into a spring of bird chirping and Ben ZIRP-ing at least, so the path of least resistance leans upwards.
Over in Japan, we have a moonrise, and a sunrise, at the same time! Both the yen and the Nikkei are going up! The yen is tangent to prior lows in the vicinity of 76.02-76.24 to the US$, while the Nikkei traded around the 8900 level, up from the November 8000-ish low that turned around mainly on the back of intervention! This combination is extremely rare over the somewhat longer time frames, and while the yen has absolutely soared this week, it remains to be seen whether this trend will last. The yen traded at 78.28 as recently as January 25th, putting the dollar at two yen cheaper! Something to watch! Volume effects are even positive! This deserves some more attention later, regarding the mechanisms that I believe underlie this pattern, and whether or not it is an eventuality, or a paradigm shift.
Greater China indices are wildly going north.
The HSI is parking itself above 20 700, putting the 20 960 August 6th post US downgrade doji within 1% of price. While it does have some price action (weak, mostly an intermediate top rejection either way to start rally continuation on the re-cross) prior to August 2011, the massive volume on this candle and significant later sell-off into the following touch is what really speaks volumes in a truly crisis-fighting world with Europe in flames and US grasping at straws to claw its way out. Thus, the HSI is parting significance with the 18 800 – 19 200 resistance range, as well as intraday significance of the 20 000 – 20 160 levels. My theory – which is supported somewhat by post-2007 price action and would be gaining more significance going forwards – is that the 20 960 level represents the “crisis discount line” of the HSI, where it will highly likely from a technical standpoint in the medium term (6 months-3 years) be seen as highly risky and thus demand a discount for any investor to dip their toes in. Looking at the long-term analysis, the main overvaluation line will be the 9-year trend upwards currently at around 27 600 (33% up, outlandish to contemplate currently, I know, but a forward P/E of 14-15 at the moment?) that was touched last time in the fall of 2010, 16 months ago. In between those levels are essentially several muddle-through levels, and a clearer explanation of this and an accompanying chart will follow to conclude this post.
Similar features, but even easier to analyze, are also present in the Shanghai Composite, which is now really piling up against its top area of the last one-year channel range. What is truly impressive is that there were no real cash injections into the Chinese economy from the government side, and it has still held up somewhat against a liquidity drain that often comes around the Chinese New Year celebrations. Several things are also happening behind the scenes to structurally change the directly related China markets, which is dealt with separately elsewhere. Taiwan Taiex is also inexorably rallying on strings after strings of positive news including macro data from both China and the US, and of course Ma Ying Jeou’s victory in the elections. Post-election up more than 5% when being closed on most of the days! Suffice to say, China markets are in the position from a fundamental, technical and volume perspective to trade significantly higher into better valuation territory, and the most interesting to watch will be the breaking of the Shanghai Composite trend channel.
Wider risk assets are going higher:
Commodities are doing really well so far. Copper has so far this year had a substantial rally and range-breakout.
In fact, most areas in the commodity complex are leaking higher generally, and this is for once feeding through to equities as well, with raw material producers and processors doing extremely well in Asia, Europe and the US. Not to mention Australia which exports the stuff. Steel is doing really well in a lot of markets as well (save Chinese bulk producers) and the massive kicker for this to continue? Why, of course, nickel prices! It’s gone from around $7.7/lb to $9.5/lb from trough (24%), and even tangenting 10 at one time earlier time. Again, it’s been marginally led by a bounce up from three-year inventory lows (surprise factor = 0) and not looking like it’s stopping. Less tightening in China and continued US (number?) strength is keeping these prices high, and with easy monetary policy as far as the eye can see, expect further planning of everything from increased infrastructure spending to worthless vanity projects that pretty much gargle concrete and steel. Resistance is also touched at the $10/lb level, so look for further breakouts to the 11.25 and 13 levels!
24% and counting… Got nickel? Best play? SSAB AB in Sweden, same fundamentals, better margins, more exposure.
Platinum got hammered badly in the CME margin hike sagas, and is currently trading significantly below gold, but is staging a comeback on economic fundamental uses, and it will be interesting to see whether the momentum can be maintained. On the topic of gold, it has recently cleared massively important levels around 1740 and looks set to stage further rallies on emerging market growth and asset diversification.
Oil got hit a bit after its massive rally off the Iran geopolitics topic, but volatility is back baby!
Speaking of gold, brace yourselves, technicals start dripping in here!
Basically, the thick resistance area that gold entered after the ZIRP re-pledge last week is still working well, and surprisingly enough works right into a fib that got initiated when the metal ran up this summer. Watch the trend line drawn for your convenience to see just how strongly we’ve ran since the start of the year. In numbers: 23 days in total, 17 up and 6 down (including today). Total range covered per ounce: US$160. Imminent cross of the 63D EMA/SMA to the advantage of EMA, meaning bullish, and the ranges are still holding well after the general confusion and $30 drop after the nonfarm numbers. So, again, rewatch the 1749 fib to see if anything there will be happening, especially on the MA cross.
Most importantly, if this price level holds at the start of next-next week, the 1800-ish highs will be filtered out from the SMA calculation, allowing the SMA to rise significantly, and thereafter result in an upwards bias on momentum and Bollinger Bands. (Exponential Bollingers are already showing this feature, but both of the bands are rising, and with the tight ranges these days it looks more like this process will continue in exponentially weighted, but not be too prevalent in standard.) Then, the 1800-1815 cross can be attempted to a greater extent.
Most of the commodity complex ramp, and gold as well, can be summed up in the AUD/USD FX pair.
Expanding Bollinger bands plus massive resistance level cross (blue arrow crashes show the strength of the resistance) indicates strong rally. However, the break following the nonfarm payroll number out of the US tonight basically indicated that the cross is already done, and the question in the next week will be whether there is a Bollinger outrunning which provides retracements – 1.10 anyone? – or if there is a slightly slower more concerted effort to surf the band and then take out the historical highs. Reference against the widening Bollinger bands at the very start of the chart and brought the Aussie to a new historical high to get a fair idea of what I am expecting in terms of price trends and appreciation. Look at the continuously increasing trends near the end of the chart as well. Where do you think the stops are at these days?
Since the Aussie is a very good proxy for risk appetite, this bodes extremely well for the commodity complex. Forward expectations on China also seem to play a good role here, and I would venture guess that the canary in the coal mine lives in the actual coal mine, which would be Australia.
So, risk on then? Yes, but not like you think, perhaps. Stay firmly out of the euro (I will in my Risk Asset Playbook post later discuss why this isn’t a risk asset, bear with me for now) and think things through thoroughly. Do you want to be on the sponsoring side of a Greek or Roman drama? Bankroll a Spanish soap? Because this is what you would end up doing, because technicals are not looking good. The last rally in the euro on risk-asset correlations flushed out momentum, and since it’s been stuck to a range. between US$1.30 and US$1.33. While bulls might like the 1.308 level (which it bounced off again today, this time upwards), bears hold all the cards on Ichimoku:
Look at how it trades heading into a kumo on the daily. The blue raffs are the channel it followed before the entry into the kumo, and the arrow marks the reversal. On a thin kumo it actually managed a break above for all of two days, but with this thick kumo which is falling, I don’t think there’s a chance. Also, look at the fibs, these are anchored to post-Greek balance sheet fudging pre-Greece rescue fibs for the euro, at around 1.5 to 1.2.
This is a slightly older chart again, but do not expect the euro to participate in any substantial risk rally anytime soon. Beyond that, the monthly/quarterly MACD is giving up up strength, and might very well peak soon regardless of further attempts at 1.33. Not good in the long term. Again, look at the euro breakdown listed to in the background, and you will still see that the surf off the 52 week lower Bollinger surf is intact (not breaking the 26-week EMA), which obviously does not bode well technically.
Oh, and by the way, more Greek drama recently, and a eurodrop not shown here – despite the risk asset run from the nonfarm numbers – all the way down to 1.307, since retraced to 1.311 (yay!).
What is instead increasingly proving to be a risk asset is the yen. Chart shown without too much comment:
As mentioned before, the yen has been rising strongly, and now as of last look is sitting back at the resistance formed at 76.50 after the Halloween intervention. Again, the Nikkei is rising, which either indicates that foreigners are buying Japanese assets, or that even the Japanese are afraid to put money into 10Y JGB’s at 0.98% yield. Unlikely given that they return a lot in inflation adjusted terms, but the stock market seems to be expected to run out of the doldrums soon, which would be about time.
In the mean time, the yen action can be described with the following statement: Japan has the world’s lowest strength/economic size ratio of any central bank in the world save the ECB. Printing yen? Maybe, but not as fast as the Fed (after all, the imports of US goods to Japan must be
mainta… erm, created) and SNB is simply having an economy small enough to shield, China keeps theirs in an iron grip, etc. The only reason that Japan is still seeking its currency rise against the euro is that the euro is nearly as close to a true bubble pop and the precipice of infinite deleveraging as you get. Furthermore, I put the punch at any potential currency sales at pinging the 126 EMA at best, which honestly isn’t much these days, and will be even less if something drastic doesn’t happen.
Back to topic, the yen looks set to keep rising in a ZIRP + LTRO + Austerity world where its central bank balance sheet expands slower than its peers. Furthermore, notice something strange these days? The usual cacaphony of calls for yen depreciation were demoted to Jun Azumi saying he is watching the markets for excessive moves. Japan does not like to do this before significant new highs are reached so as to not mess with everyone else. Given Yoshihiko Noda’s intransigence with raising taxes, tying free trade deals with the rest of the world (US in the TransPacific Partnership and a China + Korea + Japan free trade zone) and also working hard to get Japanese companies to expand abroad through market penetrations or M&A, I find it hard to see that a really weak-yen policy is truly in the interest of the Japanese much longer. Add to that an annual trade deficit given energy import needs and supply chain disruptions from the Tohoku earthquake, and one can wonder if we don’t have politicians that for the first time are interested in their national currency rising in a time of crisis. Imagine the currency inflows if European and US investors got news of a major currency soon not to be refabricated into scribbling paper! Can anyone say PE hot money? Interesting to say the least.
Putting it all together and applying it all in Hong Kong:
If we assume that the Aussie, yen and world market indices are indicating future paradigm shifts – from total crisis and .95+ correlations to asset selection and fesible investing in pockets of growth, how would this technical paradigm shift manifest itself in the place I expect to be most susceptible to the above factors: the Hang Seng Index?
Fundamental analysis is really hard at the moment, and anyone that says that they are confident in their valuations are currently not pricing tail risks at all. I firmly believe that there are some dampeners in the HSI, and also some impressive upside tail risks, but if these are enough to compensate for the extra cost of hedging the downside tail risks is a question that’s so open and dependent on policy and chance events that it beggars belief.
What we do have, however, is technicals that come into play in different scenarios, and given how “crisis-proofed” the markets have been the last few years, I dare speculate that the following chart is actionable in the longer run.
Some things are more worthy of note than others:
- 20 960 in red.
- The green resistance lines are 2 000 points appart, coming in to nearly flat odd thousands of points from 25 000 to 17 000.
- White parallel 4-year long tiger stripes! Look and make your own conclusions.
- The blue lines are the “rising China” paradigm lines. All parallel! Evenly spaced! The top line starts in early 2003, making it 9 years old! 2 500 points appreciation per year as well.
- The yellow falling trend is rather important, but watch the interactions it has with the white stripes! Bingo!
Now, what can be expected in the really short term? Well, cross 20 960 and we’ll be looking at hitting the next stripe line at 22 000 (the nonfarm numbers were out after the HSI close, the Nikkei futures added about 1% and copper 2.5-3%, Stoxx 50 around 2%, and so far the US indices are at about 1.2% up to hit new very significant highs (Dow Jones: New post 2008 high! Insanity!) 6% in the coming week? Warrants and options are your to bet on!
A highly bullish call would then be to assume another 500 points is in the run (the top line on the stripe we would be pinging), which fundamentally seems unlikely. Still, watch the action in the middle band that we’re about to break, and implicitly already have. Whenever there is simply a line break, the HSI runs to the next white line in the direction of the break, where it gets support/resistance. But when the full stripe is traded through and broken in the way of the move inside this stripe, it gets support/resistance at the next stripe line! My positioning would therefore be towards a 22 000 ping in February and a 22 500 (+8.4%) ping this quarter, before a correction takes place. We have then strictly entered the “muddle through area” of the HSI expectations thesis I put forth in the earlier part of this discussion.
if this consolidation takes place, the next level to target would first be a return to the closest stripe line, likely followed by the 20 960 or current closest stripe line (depending on price action). Catalysts for this would be something worse than Greece creeping out of the woodwork. Total disaster problems (bankrupcy of larger European bank, refreeze of the credit markets, etc.) then retesting the 18 800, 18 000 and a worst-case scenario of testing 17 000. The way out of here would then be re-trading the lowest stripe to then replay the middle stripe, but the breaking of support at 18 000 with the lowest blue line would be rather ominous. The strongest case against this technically is that so many Hong Kong shares are currently trading right above important technical support levels and with momentum, that reversing said momentum enough to push the index lower past all the individual stocks’ support levels is a prospect that one cannot really play short using my analysis…
Unless something like this happens, and the suspected election year ramp continues in the US, we should still have a consolidation, but then would target he blue “China rising” line at 23 500 currently, add 200 points per month. If the fundamental factors that speak for China really does come into play, expect to see a merciless rerun into the 27 700 line, and breaking that line would be a rather interesting thing to watch! Year of the Dragon, but most importantly, there is no zodiac animal called a bear.